April 28, 2022

Advanced Notice Bylaws: Delaware Courts Move Toward Intermediate Scrutiny

Dissident stockholders that have nominees rejected based on the terms of an advance notice bylaw often argue that the board’s rejection of the nomination notice was an action designed to interfere with the effectiveness of the company’s stockholder vote. As a result, they argue that the board’s decision should be evaluated under the Blasius “compelling justification” standard. This Cooley blog reviews recent case law involving advance notice bylaws and concludes that courts generally reject arguments that Blasius should apply. Instead, they apply an intermediate level of scrutiny to board actions:

Recent Delaware cases addressing board use of advance notice bylaws to defeat proxy fights illustrate the growing recognition by the Delaware judiciary that the outcome-determinative nature of the compelling justification standard limits its applicability in legal analysis. Advance notice bylaws provide the procedural steps that need to be followed for directors to be nominated for election to a board.

Even with relatively high stakes – after all, the enforcement of advance notice bylaws has the potential to cut off the opportunity for stockholders to decide elections, and there is the specter of directors acting in their own self-interest – Delaware courts have applied an intermediate level of review in favor of strict scrutiny. As long as stockholders had fair notice of the rules, and the rules were not enforced in a contrived manner to preclude a dissident from having a fair opportunity to launch a proxy fight, the board’s action would not be overturned.

The blog says that while the Delaware courts’ decision not to apply Blasius in this context is helpful to boards, the case law demonstrates that courts are willing to consider the board’s motives, procedures and interests when evaluating actions concerning director nominations. Accordingly, it is essential for companies to prepare and adhere to clear guidelines concerning the adoption and operation of their advance notice bylaws, and the blog shares some specific practice pointers on these topics.

John Jenkins